DFCC Bank 4Q profit jumps 74% but core banking under pressure

Specialized project financier turned a fully-fledged commercial bank, DFCC Bank PLC, saw its December quarter (4Q16) earnings soaring 74 percent from a year ago to Rs.759.1 million or Rs.2.86 a share, largely supported by trading and other incomes, provision reversals and notable decline in overheads other than staff costs, the interim results showed. 
Both the net interest income and net fee and commission declined by 6.0 percent and 38 percent, to Rs.2.7 billion and Rs.358.5 million, respectively. 
It appears that the margins have come under pressure as a result of the rising rates but the interim report did not include such ratios.  
This is despite the bank expanding its loans by a relatively strong Rs.26.6 billion or 15.6 percent to Rs.192.5 billion.  “DFCC maintained its strong presence in project lending with the bulk of loan growth coming from project loans, which increased by Rs.8.9 billion followed by trade loans, which increased by Rs.5.9 billion,” the bank said in a post-earnings release.    
The steeper fall in net fee and commission income is baffling when the loans have a recorded a healthy growth compared to its peers. Meanwhile, the deposits grew by little under 27 percent or Rs.29.6 billion to Rs.140.2 billion. The low-cost deposits measured by the current and savings account (CASA) ratio slightly improved to 20.2 percent from little under 19 percent a year earlier. 
DFCC Bank is an outlier in the industry as others saw their CASA ratios denting 
in 2016.  DFCC Bank also raised Rs.12 billion via a Rs.5.0 billion senior debenture in March and Rs.7.0 billion through a subordinated debenture issue in November 2016. 
For the year ended December 31, 2016, the banking group reported earnings of Rs.12.88 a share or Rs.3.4 billion, an increase of little under 70 percent. 
This is the first full financial year since the DFCC Bank amalgamated with DFCC Vardhana Bank on October 1, 2015 to form a fully-fledged commercial bank after the proposed merger between the DFCC banking group and NDB Bank PLC was 
abandoned halfway.
For the full year, the net interest income rose by a strong 25 percent to Rs.8.9 billion and the net fee and commission income grew by a modest 14 percent to 
Rs.1.3 billion. 
Trading gains improved as a result of the gains made from foreign exchange trading and trading of government securities. 
The net gain from financial investments was Rs.1.16 billion, the bulk coming from a dividend of Rs.712 million from DFCC’s shareholding of Commercial Bank of Ceylon.
Meanwhile, the bank improved its asset quality through, “recoveries from substantial ‘hard core’ debts following diligent remedial action” and the non-performing loan (NPL) ratio has also come down to 3.0 percent from 3.7 percent, the bank said in its statement probably referring to the 
gross NPLs.    
DFCC Bank remained well capitalized with both Tier I and Tier II capital adequacy ratios remaining at 14.6 percent and 17.5 percent, respectively, well above the industry minimums of 5.0 percent and 10.0 percent, respectively.